[Housing] Busta Rhymes

Despite interest rate angst in the air, until proven otherwise, I am sticking with the hypothesis that the US is following the trail blazed by Japan in the 1990s. Following Japan's housing bubble bust, they made one attempt to move rates off zero, but appear to have given up. Following the US housing bubbble bust, the Fed made one attempt to move rates off zero, but appear to have given up. Maybe the giant stimmies will change things for the US, but I am not counting on it. Woo-Hah! (or should it be Wu-Han!)

Rise of the Aristocrats

Part of my retirement plan was to maintain a 7-year bond ladder. This would throw off predictable low risk income as the third leg of my stool. Over the last two years, though, I have not been able to replace the top of my ladder with reasonable yields due to the Fed's zero interest policy. To reach for yield, I would have had to buy barely or below investment grade junk. As an adaptation to this environment, I created (well, borrowed from other smart people) an income strategy based on dividend aristocrats. It is a rung higher on the risk scale, but also provides some inflation protection that standard bonds don't. In addition, if I can achieve reliable income, I won't be concerned about price fluctuations in the stock prices, just like I don't care much about interest rate fluctuations holding bonds to maturity in a ladder. You still have to monitor, garden, and prune based on performance of the underlying businesses. It's my first big change in strategy in 10 years. We'll see how it works out.

Average interest rate paid on Federal debt

Federal debt has exploded since 2008. It had already been on a fast upward trend since the early 1980s, with one slow down at the end of 1990s. Then, the mortgage crisis and pandemic provided quantum leaps up. The upward trend in debt was accompanied by a downward trend in the average interest rate paid on the debt, again starting in the early 1980s. The highest rate paid was just below 14%, and the average interest rate paid now is about 2.5% across all durations. With current levels of debt, I am not sure we can afford higher interest rates or whether higher rates will be allowed by the Federal Reserve. I am not betting on higher rates.

Schrödinger's Cash

Illusion of Prosperity blog had an interesting post about GDP/M2 and how that measure dropped sharply after 2008 and fell off a cliff in 2020. It is far outside the bounds of what we have seen since 1960. That got me thinking about the velocity of money. The Illusion chart almost matches the M2 chart. The narratives in finance land have recently swung toward higher inflation expectations. You can see the effect of that swing in rising interest rates on the longer end of the curve. The textbooks say there are two types of inflation, cost-push and demand-pull. But, prices can't change without money being spent. Cash in a bank or brokerage account is inert, in an indeterminate state until it's wave function collapses when it is spent. It's Schrödinger's Cash! So far, I'd say that velocity is a drag on inflation. It may all change as the pandemic is brought under control and the stimulus money starts flowing.